Oman's fuel market has seen an increase in the capacity for exports and the adjusted pricing of retail prices

Investments being made in refining infrastructure are leading to expanded capacity and production, raising questions about how to best make use of this growing resource. Up to three quarters of domestically refined petroleum products are currently used in the country, with a subsidy system that reinforces the market. However, with new capacity increasing the potential for further exports, there are suggestions that priorities for refined products may shift. At the same time, the government is adjusting its pricing mechanisms for retail fuel to support public finances in the low oil price environment, a move that has highlighted the sector’s flexibility.

Market Players

The Oman Oil Refineries and Petroleum Industries Company (ORPIC) is responsible for the provision of all petroleum products in the sultanate, including various grades of fuel oil and gasoline, as well as liquefied petroleum gas (LPG) products such as propane and butane.

Jointly owned by the government and Oman Oil Company, ORPIC is the sole licensed refiner and petroleum product importer-exporter in Oman. Some 70-75% of domestic refinery production is currently marketed in Oman, with total sales of petroleum products in 2015 estimated at 49.2m barrels by the Ministry of Oil and Gas (MOG). Of this, 33.2m barrels were sold by the Mina Al Fahal refinery and 16m by the Sohar refinery. In 2015 ORPIC produced around 4m kilolitres of petrol and 3.5m kilolitres of diesel, according to financial investment advisory firm United Securities. Super fuel had the highest percentage of total local sales of petroleum products at 44%, followed by diesel at 33%.

ORPIC’s strategic partner, Oman Trading International, manages export-import sales and marketing of petroleum products. The total export of petroleum products from the Sohar refinery in 2015 was estimated by the MOG at 9.5m barrels, with diesel representing the highest proportion at 35%. Total imports of petroleum products by ORPIC, specifically methyl tertiary-butyl ether and ethanol, reached 1.7m barrels at the Sohar refinery.

Lpg Subsidies

Production developments in petroleum products include progress on a major LPG extraction project in Salalah Free Zone. Under the direction of the state-owned Oman Gas Company, the project aims to extract propane, butane and light condensates from natural gas flowing through the company’s southern grid. At full capacity, the plant is expected to produce 153,000 tonnes per annum (tpa) of propane, 115,000 tpa of butane and 59,000 tpa of condensate. While part of the output will go towards meeting the cooking gas needs of Dhofar Governorate, the rest will be utilised for further downstream processing or exported.

This process of balancing local consumption with exports remains a key concern for market observers. Oman used to be a net importer of LPG but has now become a net exporter to primary markets in Pakistan, India, Sri Lanka and some African markets. “LPG is a finite resource,” Nalin Kumar Chandna, general manager at National Gas Company, told OBG. “Given this, more thought needs to be given to where the country extracts the most benefit from it; whether from exports, local consumption or industrial use. Whichever area is determined to benefit the country most should be prioritised.”

With operational prices rising rapidly, a consensus is also developing that LPG subsidies need to be re-examined. “LPG prices need to be revisited and likely revised upwards,” Chandna told OBG. “Prices have remained relatively unchanged for 30 years, while operational and overhead prices have surged, shrinking margins.” That said, Oman’s LPG market is growing as prices remain subsidised, which aids its expansion in the country.

Retail Fuel Pricing

The retail fuel industry, by contrast, underwent significant regulatory overhaul in 2016. In January the government began instituting long-term price changes, spending cuts and tax hikes intended to offset decreased government revenues associated with the drop in oil prices.

Looking At Costs

As part of the cost-cutting measures, the government authorised a market-linked restructuring and deregulation of domestic fuel prices. Similar to the zero subsidy plan implemented for transport fuels in the UAE, the decision to deregulate fuel prices was aimed at saving the OR580m ($1.5bn) spent on fuel subsidies in 2015 and cutting deficit spending in 2016, which reached OR4.37bn ($11.35bn) in the first eight months of the year, according to the National Centre for Statistics and Information (NCSI).

Joice Mathew, senior manager of research and equity analyst at United Securities, told the Times of Oman in January 2016 that, “the aim of increasing petroleum product prices is to reduce the subsidy burden on the government, thereby reducing the gap in government finances. The government had spent close to OR1bn [$2.6bn] towards subsidies in 2015 and had budgeted OR400m [$1bn] for 2016. By bringing local petrol and diesel prices in line with global oil prices, the government is aiming to pass on the subsidy burden to consumers.”

By instituting a monthly price-by-committee review process, which is meant to be based on global oil prices, Oman is hoping to inject a measure of regularity and market logic into fuel pricing. Ahmed Al Haddabi, vice-chairman of the sultanate’s Majlis Al Shura economic panel, told local press in April 2016 that there are no plans to cap the cost at the pumps if the global oil price continues to rise. Given that the amount of subsidy burden passed on to consumers will go up in a scenario involving rising oil prices, the government alignment of domestic petrol prices with international oil prices represents an institutional control for public finances deficit.

As a result of deregulation and the corresponding rise in diesel prices from 146 baisas ($0.38) per litre in January to 178 baisas ($0.46) in August 2016, the cost of transporting commodities has increased in the domestic market. The impact has been felt, directly or indirectly, in major non-petroleum industries, including transportation, textiles and the auto industry. The rise in fuel prices, particularly diesel, is also creating an added burden for companies by increasing operational costs. As such, companies are factoring these costs into their budget forecasts.

Motorists, too, have been affected. Before fuel subsidies ended on January 15, 2016, the price of super-grade petrol (M95) was 120 baisas ($0.31) per litre and regular grade (M90) was 114 baisas ($0.30). Seven months later, the price of super grade had increased to 166 baisas ($0.43) per litre, and regular grade had risen to 156 baisas ($0.41). Firms licensed by the MOG to distribute and supply automotive fuels across the sultanate, namely Shell Oman Marketing Company, Oman Oil Marketing Company and Al Maha Petroleum Products Marketing Company, all reported earnings growth averaging around 9% for the first half of 2016. The three firms attributed the uptick in sales revenues primarily to fuel price reform by the Omani government.

Shift In Demand

The net effect of deregulation and consumer demand has conditioned a significant shift in the retail fuel industry. Prior to the implementation of monthly pricing systems, many motorists had preferred super-grade petrol (M95) over regular petrol, with 90% of consumption traditionally focused on super grade. Salim bin Nasser Al Aufi, undersecretary at the MOG, told the Times of Oman in May 2016 that the lifting of subsidies had resulted in a “reduction in super grade and a major growth in demand for regular grade”.

As a result, Omani refineries have begun shifting to produce more regular-grade petrol and reduce output of super grade. According to the NCSI, the sultanate met a tripling in demand for regular petrol with a 127% year-on-year increase in its production, from 758,900 barrels in the first three months of 2015 to 1.72m barrels over the same period in 2016. Super-grade petrol output posted a decrease of 11%, from 5.2m barrels in the first quarter of 2015 to 4.62m barrels over the same period in 2016.

New Grade

The undersecretary has emphasised the adaptability of the refining sector, suggesting that, “we have to match it [higher demand for regular petrol]. Whatever the market needs, we will supply.” He also said that the sultanate’s two refineries – at Sohar and Mina Al Fahal – were planning to produce a higher-quality M91 petrol grade to replace M90 in 2016. Transport already makes up a relatively high proportion of the consumer price index basket in Oman. Faced with reduced fuel subsidies, citizens will have to devote a larger portion of their family budgets toward fuel. It should be safe to assume that uptake of the new M91 petrol grade will depend on the consumer’s perception of value.